This article is written primarily for my US readers, although anyone participating in the US marketplace may also have an interest.
As I write this article we just had a good economic report. US unemployment dropped from 7.3% to 7.0% Yet the unemployment rate has now been stuck stubbornly at 7% or above for a full 5 years. The after effects of what has become known as the Great Recession are lingering and although things have gradually become better, there is no sign of an immediate turnaround coming down the pike. The reasons that the Great Recession occurred have been reported and debated ad nauseam for the past several years. Basically it was a severe financial bubble, and historians have told us from the beginning of this downturn that recessions born of these circumstances lead to particularly slow and painful recoveries.
A major question comes to my mind as we endure this long-term economic pain: Is the US in a long-term structural decline? Looking at the issue dispassionately, all great civilizations/powers/countries in history that have risen to great prominence had an inevitable decline. In my business career, I’ve had a tendency to consider this question every time we’ve entered an economic downturn, which has happened several times in my adult life.
At times I’ve been pessimistic about the reasons that the great days of the United States may have run its course: Depleted natural resources, ballooning debt, declining educational standing, hollowing out of the manufacturing base, high costs of doing business and a high standard of living leading to a much has “hungry and motivated” populace. All have played a role in my thinking previously. Other emerging countries without the above stated disadvantages seemed to be poised to run past the US.
Added to these older fears has been a new one, high unemployment, which appears more then ever to have a structural rather than cyclical basis. This is being caused in part by a phenomenon which from a business standpoint is considered a good thing: The previously highly inefficient large corporations in this country have finally figured out they didn’t need all of the people they used to employ (and lay off during recessions, only to rehire them at the peak of the next upturn).
I have worked in and with very large corporations as well the smallest startups. If you’ve read this column for a while, you’ll know that I’m a long-time critic of the inefficient ways of big business. But finally, large corporations seem to have figured out that you don’t need layers and layers of bureaucracy to conduct business. There are many reasons for this change, including primarily productivity increases from technology, caution due to a long-term poor economy and a trend toward flatter organizations. But the net result is that large corporations have been, in aggregate, extremely profitable during the worst economy of our lifetime. This is great for shareholders, but terribly frightening for job-seekers and economists. Because it appears this do-more-with-less attitude means that many people will be out of jobs (in their former professions) permanently, with the economy stuck in the mud due to reduced consumption growth.
This is a pretty dire picture, and not an unrealistic one. Is this the end of the line for the US as a great economic power, with a reduced standard of living going forward for its citizens? I am optimistic that it’s not the case– and here are some of the key factors why I believe in a better future:
Entrepreneurship and Small Business Capitalism Unleashed
One of the very greatest strengths of the US economy, and indeed US culture, is the tradition of entrepreneurship. I believe it’s because we are a nation of immigrants and everyone had to create there own place in society. Relative to other countries, there are fewer people who were handed what they have. Go back no more than a generation or two in most families, and someone was pulling themselves up by the bootstraps. We have entered a phase where many people are again being forced to reinvent themselves, just like our immigrant forefathers. The way many previously earned a living is no longer possible. As stated above, those large corporations have figured out that they won’t need legions of people anymore; as many of those tasks are now being done by automation. Even those still in the biggest companies can’t expect to be there long term; lifetime employment is mostly a thing of the past. People will need to view their careers in a much more self-sufficient manner. There is much pain that has already come with this and there will be much more yet to come. But this represents the efficient redeployment of labor that is at the core of capitalism. While painful, these labor resources will eventually find a way to make a living in a new way, ultimately expanding our economic activity and renewing growth. They will start new small businesses, invent new things or re-brand themselves as efficient “on-demand” contractors for larger companies. This will be a gradual process, but over time it will lead to a larger and more stable economy.
We need the next big thing! The last time the economy was looking this moribund from the long view; the mainstreaming of the Internet saved the day and unleashed a torrent of innovation and economic growth. Of course, this also led to one of our more recent bubbles, but that’s a subject for another day. Over the history of the US, inventions of this type have created great economic progress: the cotton gin, the light bulb, telephony, the airplane, the mass production line, the computer, the Internet, etc. These great American inventions have played a major role in building the world’s largest economy, and indeed the world economy as a whole. Have we lost the recipe for these creations? I don’t think so. The American culture of capitalism and individualism is still the perfect crucible for great innovation. So what is the next big thing that will drive broad growth? Interestingly it may come from a long moribund old-economy sector–energy exploration. I’m referring to Fracking, which may bring widespread benefits to the American economy and may flip us from a large net importer of energy to an exporter of it. Even if this forecast is wrong, I’m confident that the US innovation engine will yield another really big thing to drive growth.
Renewed Work Ethic
While the US has in fact become a bit fat, dumb and happy over the years as prosperity ensued, I for one don’t believe this is necessarily a permanent condition. The new economic conditions have a way of rekindling work ethic. Indeed for some the competitive instincts are flowing like never before. For many survival instincts are kicking in, and there’s nothing more powerful than that. All in all, I believe that the United States populace still possesses a very strong work ethic, and this will be one of the factors that kick-starts our economy once again.
Renewed Savings Rate
This is something that hasn’t received as much attention as some other adjustments to the economic rough times. The US has historically been a country of savers; however, in the go-go years of our latest bubble the savings rate actually went NEGATIVE. This is of course completely unsustainable by anyone’s math, and portended the economic collapse. The renewed savings rate over time will heal consumer’s balance sheets, leading to greater spending down the road, a more stable economy based on purchases aren’t made largely on credit, and greater capital formation for new enterprise. This is one of the more bullish signs I see for a renewal of economic growth, although this will have more of a long-term effect rather than a short term one.
Winston Churchill famously said: “The Americans will always do the right thing… after they’ve exhausted all the alternatives.” The right thing that needs to happen today is for the political culture to come back toward the center, where historically elections were won and deals consummated during governance. The two ends of the political spectrum currently look very far apart and unable to deal with each other well enough for the government to run effectively. Indeed, the two parties are as far apart as they ever have been in my lifetime with moderates having been run out of both parties. But if you look back at the longer history of our country, this isn’t an unusual situation; the political classes have always come back to the center eventually, as the electorate inevitably gets sick of extremism and governance gridlock. The sooner this happens, the better, no doubt. But history tells us that it will occur.
So those are my crazy thoughts of optimism as we continue to crawl out of the Great Recession hole. What’s your forecast on the future growth of the US economy? Where are we headed, and does it end happily? Post a comment with your own views on this subject.